Output problems can’t hold back manufacturing growth

Supply Chain

The economy is growing robustly even though staff shortages and supply chain problems are weighing on production, a survey suggests.

IHS Markit’s flash composite purchasing managers’ index came in at 61.7 in June. This was down slightly from 62.9 in May but still considerably above the 50 mark that signals growth, and one of the best performances since records began in 1998.

New orders, staffing levels and business confidence all rose during the month. The pace of job creation accelerated at its fastest pace on record as companies responded to rising workloads. While new orders increased at one of the fastest rates on record, export orders remained much softer than that seen for total new business.

The flash survey is based on about 85 to 90 per cent of total PMI responses from services and manufacturing companies each month.

IHS Markit, said: “Businesses are reporting a surge in demand in June as the economy reopens, led by the hospitality sector, meaning the second quarter looks to have seen economic growth rebound very sharply from the first quarter’s decline.”

The manufacturing sector continued to lead the way with the PMI exceeding expectations at 64.2. This was down slightly from 65.6 but economists said this “wasn’t that surprising given that the sector wasn’t severely held back by Covid-19 restrictions earlier this year, so there wasn’t much scope for its rally to continue.”

Manufacturers were held back by severe supply chain disruptions, which caused lead times to grow. This is normally a sign of rising demand so it inflated the headline manufacturing index. In response to supply shortages, companies made further efforts to build buffer stocks. Inventories of purchases expanded for the second month running, and at the fastest pace all year.

Raw material continued to bite, putting pressure on costs and forcing companies to put up their prices. The rate of cost inflation hit a record high for the second month running as more than three quarters of respondents said their costs increased. This fed into higher prices, causing inflation to rise at a record pace.

The services sector continued to recover robustly but, at 61.7, the index undershot expectations. “The fall in services business activity from 62.9 to 61.7 was a surprise given that the survey captured a full month of indoor hospitality reopening. But the lofty level suggests that the sector is still growing at a healthy pace,” Capital Economics said.

The reopening of large parts of the services sector has led to a surge in demand that businesses are struggling to meet. Staff shortages are the main hurdle and businesses are having to put up wages to attract workers.

IHS Markit said that the employment balance rose from 56.7 to 58.7 and input costs hit 71.6, just shy of a record high. These costs are being passed on to customers, with output prices rising to a record high of 58.1.

The report said: “Inflation worries have continued to intensify. Record levels of the survey’s price gauges and the further development of capacity constraints hint strongly that consumer price inflation has much further to rise after already breaching the Bank of England’s 2 per cent target in May.”